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StreetSmart: The Impact of Anchoring in a Negotiation
17 Plays7 days ago
In this episode, Brian Dietmeyer talks to Carrie Welles about the concept of anchoring in negotiations. They explore how initial offers or existing perceptions can significantly influence the outcome of negotiations, often more than any subsequent counteroffers. Brian shares insights from his experiences and studies, including anecdotes that illustrate the practical impact of anchoring on both personal and professional negotiations. This discussion is crucial for anyone looking to enhance their negotiation strategies and understand the psychological elements that affect decision-making in business.
Timestamps:
00:12 - Introduction to the topic of anchoring in negotiations.
00:45 - Brian discusses the importance of anchoring and its role in negotiation preparation.
01:22 - Explanation of why anchors are crucial in shaping negotiation outcomes.
02:01 - Discussion on different types of anchors beyond the initial offer.
03:50 - How anchors influence negotiations beyond pricing, including terms and configurations.
07:33 - Dive into the research behind anchoring and its psychological basis.
09:47 - Real-life examples of anchoring effects in negotiation scenarios.
11:37 - Strategies to reduce the impact of anchoring in negotiations.
13:49 - Importance of making the first offer and providing multiple solution options.
14:56 - Wrap-up and teaser for the next episode topic.
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Transcript
Introduction to Negotiation Anchors
00:00:01
Brian
Hello, and welcome to another edition of Street Smart, the Negotiation Podcast. I'm Brian Dietmeyer CEO of Think Inc. Business Negotiation Redefined.
00:00:11
Carrie Welles
Yes, and we are back. I'm Carrie Welles partner and vice president with Think Inc.
What are Anchors in Negotiation?
00:00:17
Carrie Welles
So today's episode is all about anchors. And you may, all of you listening, know that anchor is a very common, you commonly used term in negotiation, an important one.
00:00:30
Carrie Welles
Okay. So Brian's got a particular spin on it. We know, so we're going to hear from him. All right. So Brian, you love this topic and you talk about it a lot and you write about it a lot.
00:00:41
Carrie Welles
So what are they and why are they important?
00:00:41
Brian
Yep.
00:00:44
Brian
Yeah, we don't, we don't do a lot of skill stuff. I think we're more data focused, fact, fact focused, sort of, this is how you prepare for negotiations. But I feel like this one's cool because it's a, it's a, it's a little, a little more art. And I will say this is kickoff. The the very first time, Kerry, I was doing a workshop, my first workshop in Japan.
00:01:03
Brian
We could not in anyone here who maybe speaks Japanese we couldn't find an equivalent Japanese word for anchor and it took forever I had to draw a picture on a flip chart of a boat and
Influence of Initial Offers and Research Insights
00:01:14
Brian
an anchor so be yeah be careful using this word in Japan is that story so.
00:01:14
Carrie Welles
What about anchor? Yeah.
00:01:20
Carrie Welles
but
00:01:20
Brian
yeah Here's the thing, so you know why why are anchors important? and And listeners know we reference our friend and ex-partner, Max Bazerman of Harvard, a lot. And you know Max said to me once that his research shows that the opening offer has more impact on the final outcome of a deal than all subsequent counter offers combined.
00:01:48
Brian
And that, that's a mouthful, but think about that. So somebody sets it out there and whether it's a good one or a bad one, it has, that's another thing to think about where it has more impact on the outcome.
00:01:56
Carrie Welles
Mm hmm.
00:01:59
Brian
Then there's all this stuff that happens before you finalize the deal.
Sources and Impact of Anchors
00:02:03
Brian
And that thing had more impact than all the little subsequent things that, that happened. I tend to think of anchors as a darkboard. Somebody throws a dart at the board and then all subsequent darts are in a really tight circle right all around that's all the subsequent counter offers conversations. It's all hovering around that dart, but it it does beg the question. So it's not just you and I were just chatting about this a few minutes ago, actually. And it's not just the opening offer. We tend to think of anchors as opening offers. And as you well know.
00:02:32
Brian
You know, if, if you're a new salesperson or a new sales leader and you're going in to talk to a client and it's a, it's, you know, it's my first time contracting with them, but they're an existing client. are anchored on last year's deal. They are anchored on the two or three years before that they have a thing, a price, uh, a solution configuration, something they, they have it, uh, in their head.
00:02:54
Brian
So anytime you put an offer out there or they're throwing out there where last year you gave us 30% off. Well, guess what? The world's changed since last year. know, there was, or, or prices were high, you know, well, supply chains were a mess, you know, that kind of thing. So we can anchor on opening offers for sure. Here, here's my offer. Uh, regardless of which side does it, we can last year's deal function as an anchor because it's in everyone's brains. Uh, your competitors come in and do something stupid and undercut you.
00:03:22
Brian
That anchors the deal where the customer might be saying, Hey, your competitor just did this. And RFP comes out and, and that, that's an anchor. You, you and I have gotten a ton of them and you look at them and they've anchored.
00:03:34
Brian
They've anchored
Risks of Misleading Anchors
00:03:34
Brian
price. They've anchored process. They've anchored, um, um, solution. And, and so, uh, the, the, the other thing, the other kind of anchors that are out there.
00:03:41
Carrie Welles
Mm hmm.
00:03:46
Brian
And we've talked about this in the concession pressure episode that People are anchoring online items like price, or they're anchoring online items like your competitors.
00:03:53
Carrie Welles
Right.
00:03:57
Brian
Uh, delivery is faster than yours. And so that's a problem too, as we're anchored on line item. We said, we don't want to do that. We want anchor on the entire solution config. We want to anchor on the entire commercial terms.
00:04:08
Brian
so Carrie, we, we often talk about, you know, what, especially when, when we're coaching, what conversation are we having with the customer?
Personal Story: Vintage Truck Purchase
00:04:18
Brian
And the the reason I'm giving so many examples here is this is so prevalent. It's almost every discussion we're having and the punchline that I'll jump to quickly is we have to be aware of how we use them and we have to be aware of hearing them and and being, you know, present enough to to ah ah objectively analyze and ignore them when we need to. But we often ask the question, what's the conversation we're having right now? Are we talking about pricing product? Are we talking about, uh,
00:04:48
Brian
KPI impact because that conversation we're having, if we're anchored on the wrong thing, we are now going to have subsequent conversations about the wrong thing. Right. So it's, you know, it it's tough and you, you yeah, it's it's actually not that tough once you get this notion into your head of just being hyper aware. So, you you know, I like to tell stories and not always business stories. You also know that I like toys and and I bought years ago, you might remember it carry out a 55 Chevy Apache truck.
00:05:16
Brian
And it was, it was cool.
00:05:16
Carrie Welles
no
00:05:18
Brian
And if you've seen the Ralph Lauren ads, they have the the vintage trucks in there. That's what it looks like. And I'd always dreamed of having one of these and this was a show quality truck. It was listed at 14 grand. I went out and looked at my alternative and most of them show quality.
00:05:31
Brian
We're trading at about 10 grand. I remember Kerry sitting on my front porch, getting ready to call this guy back and, and going for like 13 to say, okay. and And then I caught myself. This is the notion. I caught myself saying, no, that's an anchor. It hit me. I was a negotiation consultant and I got sucked into that anchor, but went to that second level of, of then recognizing it as an anchor and realizing my alternatives were all about 10 grand and stop myself short.
Cognitive Biases and Psychology of Anchoring
00:06:00
Brian
And.
00:06:01
Brian
And went back now, the only downside to a bunch of the other trucks I could find is they were in like Tennessee and stuff. And I was in Chicago and I'd be having to drive a 1955 truck, you know, uh, through several States, which I was a little bit concerned about, but I went back and offered him 10. Right. he And, and the, the broker for this guy, this guy was a, one of the actors from taxi, the television show, he was selling his whole car, uh, sort of, uh, muscle cars and, uh, you know, this whole collection. And he said, look.
00:06:29
Brian
This guy has already turned down an offer for 13. He has it listed at 14. He turned down an offer for 13. I gave this, this, this rep all all the alternative analysis and here's all the other trucks out there. That guy should have taken that 13.
00:06:45
Brian
Because he he found an uneducated or an emotional buyer and the probability of getting another one of those is low.
00:06:46
Carrie Welles
Yeah. Yeah.
00:06:52
Brian
And we ah we ended up, by the way, settling, I think it was on a little bit above 10K, maybe it was like 11 or something. I think it was 11 because it was closer and I didn't have to spend the money to either transport it or fly there and drive back and have a breakdown.
00:07:06
Carrie Welles
yeah
00:07:07
Brian
So the the reason I tell you that story is even I do this for a living and I'm sure Carrie, it happens to you where you hear that and you get ready to respond and you've got to say, whoa, hold on.
00:07:19
Brian
That it's completely irrelevant. That number is a completely made up number because this guy emotionally felt like that's what it was worth.
00:07:26
Carrie Welles
Yeah, knee-jerk reaction for sure. So so I know you're you're going to talk about the data that's going to help us offset these anchors, but let's first talk about the research.
00:07:28
Brian
Yeah.
00:07:36
Carrie Welles
So you did mention Matt Bezerman and the research behind that.
00:07:36
Brian
Yeah. Yep.
00:07:40
Carrie Welles
OK, so talk to us about the research behind anchors and why that's important.
00:07:43
Brian
Yeah, it's, this stuff is founded in, in, uh, cognitive bias and psychology, behavioral economics, decision-making. There's tons of data out here. And I used to teach decision-making. We played all kinds of tricks with people to say, okay, half the room, you know, based on your experience is the incidence of this, this number and the other half of the room got another number.
00:08:04
Brian
and And they said, no, that had nothing to do with my estimation of the thing because I'm going up. And it was like a complete bias. You know, it was 20% over here and 60% over here and complete bias to a complete made up number. It's so, and Carrie, I've heard you use this, you love the official definition, which is anchoring occurs when people rely too heavily on an initial piece of information when making decisions, right? And even even if that anchor is arbitrary or irrelevant, and they they often adjust,
00:08:34
Brian
But they don't, and when, if you look at the the research on this, it's called anchoring and adjustment. So we do adjust, but we don't adjust enough. And I tried to do that with the truck. And I had to completely ignore it because it was an irrelevant, I was going to say a reverent.
00:08:48
Brian
Maybe it was also a reverent. It was an irrelevant number for this truck. So, and it's also, the researchers also say it's it's a heuristic or a cognitive shortcut, right?
00:08:59
Brian
it just, people quickly go, okay, here's the number. So I'll just respond to it. And and again, they don't, we don't adjust enough away from it.
00:09:04
Carrie Welles
Yeah, and yeah, yeah.
00:09:07
Brian
And the fun, the final problem with the research shows us is this lack of awareness. And so that's what I hope you and I are doing for people that are listening today of saying, be aware, it's not just the opening offer. You're getting anchored on stuff all day long in business deals and you got to stop and and use the carry definition, which is, is it that piece of information? Is it arbitrary or irrelevant? And is it is, if it is, you ignore it.
Strategies to Mitigate Anchoring Effects
00:09:31
Carrie Welles
Yes, yes, there is it useful. Yeah, exactly. Okay. so So let's give our listeners some more real life examples because this is the best part. So so and you gave a great example with your truck.
00:09:37
Brian
Yeah.
00:09:40
Carrie Welles
Love that. So give us more. Give us more examples.
00:09:43
Brian
So you, you've done this, you and I have both done this a ton. So we, when we do, uh, negotiation training classes, we bring this into deal coaching as well, but I want to go to training for a moment. So we have people negotiate deals exactly the like 10, 10 pairs of two people buyer and seller with exactly the same case studies. And they come up with a range in in the particular case study we use. There's a range of solutions of anywhere from about seven to 32 million where they can reach agreement.
00:10:11
Brian
and and And when the payers come back and report, there's a range up there of of that wide. And so the question is, one of the first things that we do is we ask, we start kind of diagnosing the preparation and the execution of their plan. And the first part of their prep is, did you think about your opening offer? And if you did, what was it?
00:10:32
Brian
And, and, and do you think there's a correlation that most of them say, no, there's there's not that well, so we start listing their opening offers and everybody on the low side opened low, either them or the other side, everybody on the high side. Not only that, the thing that I find even more interesting Carrie is when you're buying and selling something, you could sell a really typical, simple tactical solution or a very strategic one. So those opening offers, we look at what was the number.
00:10:57
Brian
And I often just ask the question, what was it that you were buying and selling? Was it just this or was it this plus this plus this? Was it the whole enchilada? and And there's a, just this correlation directly to the outcome, not only about how much we sold it for, but what was it that was bought and sold? The people who anchored properly were selling much more robust deals.
00:11:18
Carrie Welles
Got it. Yeah. Okay. Okay. Those are, yeah, those are some, some good examples. So, so let's finish with how can we help our listeners to reduce the impact of anchoring?
00:11:30
Carrie Welles
So they're up against it. It's a knee jerk reaction. We often panic, salespeople often do. So, so what's the best way that our listeners can avoid or can reduce because sometimes you can avoid, but reduce the impact.
00:11:45
Brian
Yeah. So awareness we've always talked about, and one of our consultants says a lot, just because they ask doesn't mean you have to answer. And I love that. That's like a really actionable part of awareness. But just if everybody walks away from this by saying, holy smokes, both offensively and defensively, the words that come out of my mouth about pricing or deal structure or solution configuration.
00:12:10
Brian
I just set an anchor and we want to be very careful offensively, not offensively, but offensively, how we set those anchors. We want to be hyper aware of and be able to ignore irrational or fake anchors that are just made up. And one of the ways, you know, we we want to do that diplomatically. And my my favorite way is, is to ask questions. You know, if somebody comes up like this guy had the truck at 14 grand, okay, where did he come up with that? You know, so help me understand that a little bit more.
00:12:37
Brian
So not just flat out ignore, that's a little bit rude, but the the what what the research says too, which I think is true, is you can introduce multiple alternate reference points. Well, it's interesting that you want this because what I'm finding in these other three areas is this. And so now we've got four anchors out there and and it's a really nice way, but we need it.
00:13:00
Brian
Close this out. Hyper aware offensively and defensively of anchors and, and use, be very careful about what we lay out there and be very careful about just because they say something doesn't mean that we need to respond to that exact thing.
00:13:15
Carrie Welles
Exactly. Brian, you reminded me because what we didn't mention in our last episode about multiple solution options. So you had said earlier that the first offer anchors the whole negotiation and that's true.
00:13:25
Brian
ye
00:13:26
Carrie Welles
So all of you listening, we do want you making that first offer. We do want you giving the first offer with options, multiple solution options to the customer, because then you will anchor the negotiation and likely it's going to work in your favor.
00:13:42
Brian
So I, I'm really glad you bring that up. And, and that is exactly what we prescribe. And people often ask who should give the first offer. And, and I'm going to go back to my pal Max Bazerman again. Max always says, look, when you've got a wide range of potential outcomes and really bad data, you want to let the other side go first, but then you have to be able to ignore it. If it's a completely irrational anchor and that's man, that takes some discipline.
00:14:11
Brian
So the reason we, uh, prescribed going first is we want to have better data than everybody else all the time. So there might be a situation, maybe a personal situation. You have no clue of the value of something. So you just let the other side go out there and who knows you might get lucky. It could be lower than what you're willing to spend, but in B2B deals, we want to have better data and we want to, you know, we want to anchor as close to what we want that final outcome to be as possible, both on what it is that's being bought and sold and and how much risk people are going to assume and how much they're going to pay for it.
00:14:41
Carrie Welles
Right. Okay. All right.
Conclusion and Future Topics
00:14:42
Carrie Welles
Good. Good. Well, thanks for joining. So that's going to end our episode today. What are we talking about next time?
00:14:49
Brian
We, I actually don't know Carrie, so you did, I don't know negotiation.
00:14:55
Carrie Welles
Yeah,
00:14:57
Brian
I know that we're going to talk about negotiation and we're going to talk about something we well as we always try to do, talk about something street level that you can use today.
00:15:06
Carrie Welles
yeah exactly. All right. So join us then. We'll see you around.